Peter Schiff: The Dollar’s Loss Is Not America’s Win

The big story last week was the dollar’s slow meltdown. The dollar index broke below 90 for the first time since the spring of 2018.

The financial media hasn’t ignored the dollar weakness, but Peter said they don’t seem to grasp the significance of what’s going on, nor do they realize how much further the dollar has to fall. In fact, a lot of the talk has focused on the positives of dollar weakness. In his podcast, Peter argues this growing dollar weakness is not America’s win.

Peter said he thinks all of this is setting the stage for a major decline in the dollar in 2021.

And it’s not going to end at 2021. This is going to be another multi-year bear market in the dollar.”

Peter thinks we will take out the all-time record low in the dollar index from 2008 which was 71.58.

So, we’ve got a long way to fall to get down there. We’ve got about 20 points. But then it’s an even bigger drop in uncharted territory once we take out 70.”

Weekly jobless claims continue to spike upward. Last week we saw 885,000 Americans file first-time unemployment claims. The weak labor market puts more pressure on Congress and the Fed “to do something.”

Of course, what they do is just create more inflation because they somehow think there’s a tradeoff, and if we have more inflation, we’ll have less unemployment. In reality, we’re going to have more unemployment because of more inflation. And even the people who are employed are going to suffer as a result of the rising cost of living.”

Peter said the idea that a weak dollar is somehow a positive for the economy is nonsense. Think back to the last time was had a bear market in the dollar. The price of oil went up to $150 a barrel. That was the era of $4-plus a gallon gas.

The inflation signs are already there. Oil is pushing back close to $50 a barrel.

Pundits think that a weak dollar gives US exporters a competitive advantage. Peter said that’s not really true. Countries export so they can import. Societies don’t really want currency. They want products.

You’re not exporting products just for the sake of having work. You’re exporting products because you want to import other products.”

Trade is based on comparative advantage. If one country can make product Y more cheaply and efficiently than another country, and that other country can make product X more cheaply and efficiently, both benefit from trading. A country can create a surplus of its product, sell it, and use the earnings to buy something else.

If your currency goes down and then you earn fewer units of foreign currency – so if we earn 20% fewer euros based on putting our goods on sale and selling our good in Europe at a lower price – if we’re earning fewer euros, then when we want to buy products and want to import from Europe, we can’t buy as much. So basically what happens when your currency goes down and you put your exports on sale, you can’t import as much as a result of your exports. So in other words, you’re actually earning less for your labor. You’re not going to be able to import as much goods as what you had to export to pay for them. So, it’s like a decline in your standard of living.”

The weakness in the dollar should also be a warning sign that the game is coming to an end for the Fed and all of the money printing and quantitative easing.

In the week reflected by the latest Federal Reserve data, the central bank’s balance sheet surged by $120 billion. It now stands at $7.363 trillion. It was the biggest increase in the balance sheet since May – the early days of QE infinity. Peter said he thinks there’s a good chance we could see a $10 trillion Fed balance sheet by the end of 2021.

There was also a $228.1 billion increase in the money supply as measured by M2.

That’s just one week – $228.1 billion was magically created out of thin air. Obviously, a lot of this to buy up all these government bonds.”

The number of Treasuries on the Fed balance sheet has doubled since the beginning of the year.

So, this year, the Fed has bought as many US Treasury bonds as it did in all the years prior to this year coming in. And my guess is they’re going to break that record next year.”

This gets to the root of why the weakening dollar is a warning sign. As long as the dollar was stable and strong, the Fed could create as many dollars as it pleased. As long as there was a strong demand for dollars, the central bank could increase the supply of dollars with no problem. That’s how the Fed can hold interest rates artificially low even as the US government borrows billions of dollars every month. The Fed can keep bond prices supported through QE bond purchases – in effect creating artificial demand for bonds. But Peter has been saying for years that the Fed is sacrificing the dollar to prop up the bond market, along with stocks, real estate and the broader economy.

Now, the canary in the coal mine here is the weakening dollar. Because now the market is saturated with dollars. The market doesn’t want any more dollars. But the only way the Fed can keep a lid on interest rates is to keep printing dollars. The Fed has to keep adding to the supply of something where there is already inadequate demand. The fact that the dollar is falling right now shows you that there isn’t adequate demand for the number of dollars that already exist.”

On top of that, the US is running a massive trade deficit. The US is effectively putting $80 billion or so into the global economy every month. The world doesn’t need those dollars to buy US exports. By definition, that’s the deficit. They’ve bought all the products they need and they’ve got $80 billion left over.

So, that’s putting downward pressure on the dollar. In the meantime, the budget deficits are getting bigger and bigger and now the Federal Reserve wants to monetize those to prevent interest rates from rising. So, they have to expand the money supply even faster and add to the glut of dollars on the market. So in this dynamic, the only thing that can happen is that the dollar goes down. You have all this supply and you don’t have demand.”

In a nutshell, the only reason the US economy works is because of the overvalued dollar.

The only reason the Fed has been able to get away with all the stimulus and the bailouts is because the world has made it possible by buying up all those dollars. But now that the world doesn’t want those dollars, and is in fact starting to hemorrhage those dollars — this whole process is going to unravel.”

Peter said he thinks the days of the dollar as the go-to safe-haven asset are gone. The question is how long will it serve as a reserve currency?